January 18, 2021 Delivered By Email: pward@mfda.ca Paige Ward General Counsel, Corporate Secretary and Vice-President Policy Mutual Fund Dealers Association of Canada 121 King St. W., Suite 1000 Toronto, Ontario M5H 3T9

Dear Ms. Ward: RE: Proposed Amendments to MFDA Regulatory Instruments to Conform to Requirements Under

the Client Focused Reforms Amendments to National Instrument 31-103 – Registration Requirements, Exemptions and Ongoing Registrant Obligations

The Investment Funds Institute of Canada (IFIC) welcomes the opportunity to provide comments on the proposed amendments to the Mutual Fund Dealers Association of Canada (MFDA) regulatory instruments to conform to requirements under the Client Focused Reforms (CFRs).

IFIC is the voice of Canada’s investment funds industry. IFIC brings together 150 organizations, including fund managers, distributors and industry service organizations to foster a strong, stable investment sector where investors can realize their financial goals. IFIC works collaboratively with industry representatives, regulators, governments and investor advocates to help cultivate a system that is fair, secure and efficient for all stakeholders.

IFIC operates on a governance framework that gathers member input through working committees. The recommendations of the working committees are submitted to the IFIC Board or board-level committee for direction and approval. This process results in a submission that reflects the input and direction of IFIC members.

IFIC members have reviewed the proposed changes and agree that the amendments generally align with the requirements set out in the CFRs. We would, however, like to provide feedback on a number of the proposed changes.

Branch Manager Supervision

MFDA Policy No. 2 Minimum Standards for Account Supervision (Policy No. 2) has been amended to conform with the CFRs. While the majority of the amendments are reasonable and appropriate, we have serious concerns with the proposed changes that relate to the supervision of a suitability determination.

It is the registered salesperson’s responsibility to make a suitability determination at the time of the transaction. A suitability determination is underpinned by the registered salesperson’s know your client (KYC) and know your product (KYP) obligations. It is not reasonable or practical to require the Branch Manager to also make a suitability determination. The role of the Branch Manager is to review or asses a transaction to ensure it is within the range of possible suitable recommendations 1 , not to make an

1 See NI 31-103 CP s.13.3 Interests of the client come first (b)

2 Ms. Paige Ward Re: Proposed Amendments to MFDA Regulatory Instruments to Conform to Requirements Under the Client Focused Reforms Amendments to National Instrument 31-103 – Registration Requirements, Exemptions and Ongoing Registrant Obligations January 18, 2021

independent suitability determination. We would expect the approach of a Branch Manager to be similar to the approach that the CSA has indicated it will take in the notice of amendments to NI 31-103:

“We clarify that if we review a suitability determination made by a registrant, we will do so without hindsight and on the basis of what a reasonable registrant would have done under the circumstances.”2

We recommend the proposed changes to Policy No. 2 be amended as set out in Appendix A (highlighted in yellow beginning on page 8 of Appendix A) to continue to require Branch Managers to review or assess a suitability determination instead of making a suitability determination.

Securities vs. Investments

The MFDA has proposed changes to their rules to refer to investment/investments in the KYC, KYP and suitability determination provisions instead of referring to security/securities. We understand that the change is intended to align with dealer business models and not intended to signal a change in interpretation or application of the rules. However, we are concerned that the change may have unintended consequences for dealers who distribute bank issued deposit products, such as guaranteed investment certificates (GICs) or high interest savings accounts (HISAs).

Bill C-86, Budget Implementation Act, 2018, No. 2 (Bill C-86), commonly referred to as the consumer protection framework, was introduced in the House of Commons on October 29, 2018. If passed, Bill C-86 will make changes to the consumer protection provisions in the Bank Act. The definition of “investments” is broader than “securities” and may result in duplicative or inconsistent requirements for bank issued deposit products distributed through an MFDA dealer. Inconsistent requirements can create unachievable expectations or gaps in otherwise effective regulation. Provisions that may overlap or conflict include training, complaint handling, investment disclosures, KYP and suitability determinations.

Given the critical importance of these potential consumer protection provisions, we ask the MFDA to consider the continued use of security/securities instead of investment/investments in some instances until a thorough review of the requirements set out in Bill C-86 can be conducted. Areas of particular concern include provisions and guidance that impact KYP and making a suitability determination.

We also understand that additional guidance is forthcoming from the MFDA with respect to suitability determinations. Prior to issuing that guidance, we would ask the MFDA to review this proposed guidance to carefully consider whether the use of security/securities is appropriate versus investment/investments.

Client Lending and Margin

MFDA Rule 3.2.1 Client Lending and Margin prohibits Approved Persons from lending money, extending credit, permitting the purchase of securities by a client on margin or providing a guarantee in relation to a loan of money unless the noted conditions apply.

We believe that the proposed change to 3.2.1(b) (ii) should be amended to require approval from the Member to permit the purchase of securities on margin or provide the guarantee, resulting in the following consequential amendment:

(ii) the Approved Person has obtained the written approval of their Member to lend the money, or extend the credit, permit the purchase of securities on margin, or provide the guarantee;

Relationship Disclosure Information

The housekeeping amendments noted for MFDA Rule 2.2.7(1) and the consequential amendments to MSN-0075 Relationship Disclosure are not sufficiently clear. Specifically, the requirements set out in

2 See page 15 https://www.osc.gov.on.ca/documents/en/Securities-Category3/ni_20191003_31-103_reforms-enhance-client-

registrant-relationship.pdf

3 Ms. Paige Ward Re: Proposed Amendments to MFDA Regulatory Instruments to Conform to Requirements Under the Client Focused Reforms Amendments to National Instrument 31-103 – Registration Requirements, Exemptions and Ongoing Registrant Obligations January 18, 2021

sections 2.2.7(1) (b), (c) and (d) overlap and are potentially confusing. Given these sections are intended to work together to provide a fulsome description of the nature of the products and services offered by the Member, we recommend that 2.2.7(c) and (d) be amended to be subsections 2.2.7(b)(i) and 2.2.7(b)(ii), respectively, of 2.2.7(b).

* * * * *

IFIC appreciates the opportunity to provide feedback on the proposed amendments. We would be pleased to provide further information or answer any questions you may have. Please feel free to contact me by email at kvickers@ific.ca or by phone 416-309-2324. Yours sincerely, THE INVESTMENT FUNDS INSTITUTE OF CANADA

By: Kelly Vickers Senior Policy Advisor cc: Anne Hamilton Senior Legal Counsel

British Columbia Securities Commission 701 West Georgia Street P.O. Box 10142, Pacific Centre Vancouver, British Columbia, V7Y 1L2 ahamilton@bcsc.bc.ca

Attachment: Appendix A – MFDA CFR Amendments – Proposed Changes

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MFDA POLICY NO. 2

MINIMUM STANDARDS FOR ACCOUNT SUPERVISION

Introduction

This Policy establishes minimum industry standards for account supervision. These standards represent the minimum requirements necessary to ensure that a Member has procedures in place to properly supervise account activity. This Policy does not:

(a) relieve Members from complying with specific MFDA By-laws, Rules and Policies andsecurities legislation applicable to particular trades or accounts; or

(b) preclude Members from establishing a higher standard of supervision, and in certainsituations a higher standard may be necessary to ensure proper supervision.

To ensure that a Member has met all applicable standards, Members are required to know and comply with MFDA By-laws, Rules and Policies as well as applicable securities legislation which may apply in any given circumstance. The following principles have been used to develop these minimum standards:

(a) The term "review" in this Policy has been used to mean a preliminary screening designedto detect items for further investigation or an examination of unusual trading activity orboth. It does not mean that every trade must be reviewed. The reviewer must use reasonablejudgement in selecting the items for further investigation.

(b) It has been assumed that Members have or will provide the necessary resources andqualified supervisors to meet these standards.

(c) The Iinitial compliance with the know-your-client (“KYC”) rule and the requirement tomake a suitability determination in respect of investments requirements are is primarily theresponsibility of the registered salesperson. The supervisory standards in this Policyrelating to KYC and suitability determinations are intended to provide supervisors with achecklist against which to monitor the handling of these responsibilities by the registeredsalesperson.

Members that seek to adopt policies and procedures relating to branch and head office supervision or the allocation of supervisory activities that differ from those contained in this Policy must demonstrate that all of the principles and objectives of the minimum standards set out in this Policy have been properly satisfied. Further, any such alternative policies and procedures must adequately address the risk management issues of the Member and must be pre-approved by MFDA staff before implementation.

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Supervisory staff has a duty to ensure compliance with Member policies and procedures and MFDA regulatory requirements, which includes the general duty to effectively supervise and to ensure that appropriate action is taken when a concern is identified. Such action would depend on the circumstances of each case and may include following up with the registered salesperson and/or the client. Supervisory staff must also maintain records of the issues identified, action taken and resolution achieved.

I. ESTABLISHING AND MAINTAINING PROCEDURES

Effective self-regulation begins with the Member establishing and maintaining a supervisory environment which both fosters the business objectives of the Member and maintains the self- regulatory process. To that end a Member must establish and maintain procedures which are supervised by qualified individuals. A major aspect of self-regulation is the ongoing education of staff in all areas of sales compliance.

Establishing Procedures

1. Members must appoint designated individuals who have the necessary knowledge ofindustry regulations and Member policies to properly perform the duties.

2. Written policies must be established to document supervision requirements.

3. Written instructions must be supplied to all supervisors and alternates to advise them onwhat is expected of them.

4. All policies established or amended should have senior management approval.

Maintaining Procedures

1. Evidence of supervisory reviews must be maintained. Evidence of the review, such asinquiries made, replies received, date of completion etc. must be maintained for seven yearsand on-site for one year.

2. An on-going review of sales compliance procedures and practices must be undertaken bothat head office and at branch offices.

Delegation of Procedures

1. Tasks and procedures may be delegated to a knowledgeable and qualified individual butnot responsibility.

2. The Member must advise supervisors of those specific functions which cannot bedelegated, such as approval of new accounts.

3. The supervisor delegating the task must ensure that these tasks are being performedadequately and that exceptions are brought to his/her attention.

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4. Those who are delegated tasks must have the qualifications and required proficiency to perform the tasks and should be advised in writing of their duties. The general expectation is that tasks be delegated only to individuals with the same proficiency as the delegating supervisor. In certain limited circumstances, it may be acceptable to delegate specialized tasks to an individual that has not satisfied the proficiency requirements provided that the individual has equivalent training, education or experience related to the function being performed. The Member must consider the responsibilities and functions to be performed in relation to the delegated tasks and make a determination as to appropriate equivalent qualifications and proficiency. The Member must be able to demonstrate to MFDA staff that the equivalency standard has been met. Tasks related to trade supervision can only be delegated to individuals that possess the proficiency of a branch manager or compliance officer.

Education

1. The Member's current policies and procedures manual must be made available to all sales and supervisory staff.

2. Introductory training and continuing education should be provided for all registered

salespersons. For training and enhanced supervisory requirements for newly registered salespersons, please refer to the MFDA Policy No.1 entitled “New Registrant Training and Supervision Policy.”

3. Relevant information contained in compliance-related MFDA Member Regulation Notices

and Bulletins and compliance-related notices from other applicable regulatory bodies must be communicated to registered salespersons and employees. Procedures relating to the method and timing of distribution of compliance-related information must be clearly detailed in the Member's written procedures. Members should ensure that they maintain evidence of compliance with such procedures.

II. OPENING NEW ACCOUNTS

To comply with the KYC and suitability determination requirements set out in MFDA Rule 2.2, each Member must establish procedures to maintain accurate and complete information on each client. The first step towards compliance with this rule is completing proper documentation when opening new accounts. Accurate completion of the documentation when opening a new account allows both the registered salesperson and the supervisory staff to conduct the necessary reviews to ensure that recommendations made for any account are suitable appropriate for the client and put the client’s interests firstin keeping with investment objectives. Maintaining accurate and current documentation will allow the registered salesperson and the supervisory staff to ensure that requirements under Rule 2.2 are met.all recommendations made for any account are and continue to be appropriate for a client's investment objectives.

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Documentation of Client Account Information

The information set out under paragraphs 3 and 4, below, represents a list of minimum requirements. The Member may require clients to provide any additional information that it considers relevant in order to comply with Rule 2.2.1.

1. A New Account Application Form (“NAAF”) must be completed for each new account.

2. A complete set of documentation relating to each client’s account must be maintained bythe Member. Registered salespersons must have access to information and documentationrelating to the client’s account as required to service the account. In the case of a Level 1Introducing Dealer and corresponding Carrying Dealer, both Members must maintain acopy of each client's NAAF.

3. For each account of a client that is a natural person, the Member must obtain informationsufficient to allow for the operation of the account and sufficient to determine the essentialfacts relative to each client, which would include, at a minimum, the following information:(a) name;(b) type of account;(c) residential address and contact information;(d) date of birth;(e) employment information;(f) number of dependants;(g) other persons with trading authorization on the account;(h) other persons with a financial interest in the account;(i) investment knowledge;(j) risk profiletolerance;(k) investment needs and objectives;(l) investment time horizon;(m) financial circumstances, including income and net worth;(n) net worth;(o)(n) for non-registered leveraged accounts, details of the net worth calculation,

specifying liquid assets plus any other additional assets less total liabilities; (p)(o) information required by other laws and regulations applicable to the Member’s

business as amended from time to time including information required for relevant tax reporting; information required for compliance with the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations and any authorization necessary to provide information to the MFDA under applicable privacy legislation.

In the case of accounts jointly owned by two or more persons, information required under paragraph 3, subsections (a), (c), (d), (e), (f), and (i) must be collected with respect to each

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owner. Income and net worth may be collected for each owner or on a combined basis as long as it is clear which method has been used.

The preceding provides a list of minimum requirements. The Member may require clients to provide any additional information that it considers relevant.

4. For each account of a client that is a corporation, trust or other type of legal entity, theMember must obtain information sufficient to allow for the operation of the account andsufficient to determine the essential facts relative to the client, which would include, at aminimum, the following information:(a) legal name;(b) head office address and contact information;(c) type of legal entity (i.e. corporation, trust, etc.);(d) form and details regarding the organization of the legal entity (i.e. articles of

incorporation, trust deed, or other constating documents);(e) nature of business;(f) persons authorized to provide instructions on the account and details of any

restrictions on their authority;(g) investment knowledge of the persons to provide instructions on the account;(h) risk profiletolerance;(i) investment needs and objectives;(j) investment time horizon;(j)(k) financial circumstances, including income and net worthtime horizon; (k) income;(l) net worth;(m) information required by other laws and regulations applicable to the Member’s

business as amended from time to time including information required for relevanttax reporting; information required for compliance with the Proceeds of Crime(Money Laundering) and Terrorist Financing Regulations and any authorizationnecessary to provide information to the MFDA under applicable privacy legislation.

The preceding provides a list of minimum requirements. The Member may require clients to provide any additional information that it considers relevant.

5. For supervisory purposes, the following account types must be readily identifiable:registered accounts; leveraged accounts; and accounts where the client is a Related Person,as defined by the Income Tax Act (Canada), of the registered salesperson and the registeredsalesperson has full or partial control or authority over the financial affairs of the client.

6. If the NAAF does not include KYC information, this must be documented on a separateKYC form(s). Such form(s) must be signed by the client and dated. A copy of the

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completed NAAF and KYC form, if separate from the NAAF, must be provided to the client.

7. The Member must have internal controls and policies and procedures in place with respectto the entry of KYC information on their back office systems. Such controls should providean effective means to detect and prevent inconsistencies between the KYC informationused for account supervision with that provided by the client.

8. Except as noted in the following paragraph, NAAFs must be prepared and completed forall new clients prior to the opening of new client accounts. The new account or KYCinformation must be approved by the individual designated as responsible for the openingof new accounts under Rule 2.2.3 no later than one business day after the initial transactiondate. Records of all such approvals must be maintained in accordance with Rule 5.

9. Notwithstanding the preceding paragraph, NAAFs for clients of a registered salespersontransferring to the Member must be prepared and completed within a reasonable time (butin any event no later than the time of the first trade). The new accounts or KYC informationfor clients of the transferring salesperson must be approved by the individual designated asresponsible for the opening of new accounts under Rule 2.2.3 no later than one businessday after the date that the NAAF is completed. Records of all such approvals must bemaintained in accordance with Rule 5.

10. In the event that a NAAF is not completed prior to or within a reasonable time after openingan account, as required by this Policy, the Member must have policies and procedures torestrict transactions on such accounts to liquidating trades until a fully completed NAAFis received.

Changes to KYC Information

1. The registered salesperson or Member must update the KYC information whenever theybecome aware of a material change in client information as defined in Rule 2.2.4(a), andmust review KYC information with the client at a frequency of no less than once every 36months.

2. On account opening, the Member should advise the client to promptly notify the Memberof any material changes in the client information, as defined in Rule 2.2.4(a), previouslyprovided to the Member and provide examples of the types of information that should beregularly updated.

3. In accordance with Rule 2.2.4(e), Members must also, on an annual basis, request in writingthat clients notify them if there has been any material change in client information, asdefined in Rule 2.2.4(a), previously provided, or if the client's circumstances havematerially changed.

3.4. Access to amend KYC information must be controlled and instructions to make any such amendments must be properly documented.

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4.5. A client signature, which may include an electronic signature, or other internal controls sufficient to authenticate the client’s identity and verify the client’s authorization must be used to evidence any change in client name, client address or client banking information.

5.6. Material changes to client information, as defined in Rule 2.2.4(a), may be evidenced by a

client signature, which may include an electronic signature or, alternatively, such changes may be evidenced by maintaining notes in the client file detailing the client’s instructions to change the information and verified by providing written confirmation to the client with details of the instructions and providing an opportunity for the client to make corrections to any changes that have been made.

6.7. All material changes in client information, as defined in Rule 2.2.4(a), must be approved by

the individual designated as responsible for the opening of new accounts under Rule 2.2.3 no later than one business day after the date on which notice of the change in information is received from the client. When approving material changes, branch managers should be reviewing the previous KYC information to assess whether the change appears reasonable. Branch managers should be aware of situations where material changes may have been made to justify unsuitable trades or leveraging that would not be suitable, or put the client’s interests first, as required under Rule 2.2.6(1) (hereafter referred to as “unsuitable”). For example, branch managers should investigate further material changes that accompany trades in higher risk investments or leveraging or changes made within a short period of time (for example 6 months). Records of all such approvals must be maintained in accordance with Rule 5.

7.8. Where any material changes have been made to the information contained in the NAAF or

KYC form(s), the client must promptly be provided with a document or documents specifying the current risk profiletolerance, investment needs and objectives, investment time horizon, income and net worth that applies to the client’s account.

8.9. The last date upon which the KYC information has been updated or confirmed by the client

must be indicated in the client’s file and on the Member’s back office system.

Pending/Supporting Documents

1. Members must have procedures in place to ensure supporting documents are received within a reasonable period of time of opening the account.

2. Supporting documentation that is not received or is incomplete must be noted, filed in a

pending documentation file and reviewed on a periodic basis.

3. Failure to obtain required documentation within 25 days of the opening of the account must result in positive actions being taken.

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Client Communications

1. All hold mail must be authorized by the client in writing and be controlled, reviewed on a regular basis and maintained by the responsible supervisor. Hold mail should never be permitted to occur over a prolonged period of time (i.e. in excess of 6 months).

2. Returned mail is to be promptly investigated and controlled.

III. ASSESSING SUITABILITY OF INVESTMENTS AND BORROWING

TO INVEST (“LEVERAGING”) STRATEGIES

General

1. Members must establish and maintain policies and procedures with respect to their suitability obligations, including the obligation to make a suitability determination which satisfies the criteria set out under Rule 2.2.6(1)(a), and, in accordance with requirements under Rule 2.2.6(1)(b), puts the client’s interest first. The policies and procedures must include guidance and criteria for registered salespersons to ensure that recommendations made and orders accepted (with the exception of unsolicited orders accepted pursuant to Rule 2.2.6(2.1)2.2.1(d)) are suitable for the client and puts the client’s interest first. The policies and procedures must also include criteria for supervisory staff at the branch and head office to review the suitabilitymake review a suitability determination considering ofall the investments in each client’s account and the client’s use of borrowing to invest (“leverage”)..

2. The criteria for selecting trades and leverage strategies for review, the inquiry and resolution process, supervisory documentation requirements and the escalation and disciplinary process must be documented and clearly communicated to all registered salespersons and all relevant employees. Registered salespersons must be advised of the criteria used in assessing suitabilitymaking assessing a suitability determination, actions the Member will take when a trade or leverage strategy has been flagged for review and appropriate options for resolution.

Leverage Suitability

1. The minimum criteria listed below are intended to prompt a supervisory review and investigation by the Member of a leverage strategy. While Members must consider all the criteria noted below in assessing the suitability of the leverage strategy. the triggering of one or more of the criteria may not necessarily mean that the leverage strategy is unsuitable. The Member’s supervisory review and investigation must be able to demonstrate that use of the leverage strategy was suitable for the client, and put the client’s interests first.

The review and investigation of leverage suitability must be conducted in a fair and objective manner having regard only to the best interests of the client in accordance with Rule 2.1.4 and the general standard of conduct required by Rule 2.1.1. Where the leverage strategy is approved, the analysis and rationale must be documented.

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Minimum criteria that require supervisory review and investigation include the following: (a) investment knowledge of low or poor (or similar categories); (b) risk profile risk tolerance of less than medium (or similar categories); (c) age of 60 and above; (d) investment time horizon of less than 5 years; (e) total leverage amount that exceeds 30% of the client’s total net worth; and (f) total debt and lease payments that exceed 35% of the client’s gross income, not

including income generated from leveraged investments. Total debt payments would include all loans of any kind whether or not obtained for purpose of investment. Total lease payments would include all significant ongoing lease and rental payments such as automobile leases and rental payments on residential property.

2. With respect to a recommendation for a client to use a leveraging strategy, Members and registered salespersons may not obtain a waiver from the client to exempt the Member and the registered salesperson from their obligations to ensure that such a recommendation is suitable for the client, and puts the client’s interest first the suitability of such a recommendation.

3. The Member must review and maintain documents to facilitate proper supervision. This would include:

(a) Lending documents and details of lending arrangements – The Member or

registered salesperson must either maintain copies of the lending documents or make sufficient inquiries to obtain details of the loan, including interest rate, terms for repayment, and the outstanding loan value. Where the Member or registered salesperson assists the client in completing the loan application, the Member must maintain copies of lending documents in the file, including copies of the loan application.

Where the client arranges their own financing, it may be difficult in some cases for the Member or registered salesperson to obtain details of the lending arrangement from the client. Where a client is unwilling to provide details of the lending arrangement, the Member and registered salesperson must advise the client that they cannot assess the suitabilitymake a suitability determination of the leverage strategy without additional information and maintain evidence of such advice.

(b) NAAF and updates to KYC information – Supervisory staff must compare the client’s KYC information with all other information received in respect of the loan and follow up on any material inconsistencies, which may require obtaining additional supporting documentation from the client.

(c) Numerical details in support of income and net worth calculations required by

sections 1(e) and 1(f).

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(d) Trade documents, notes supporting client instructions or authorizations and notes supporting the rationale for recommending a leverage strategy to the client.

Registered Salespersons

1. All recommendations made and orders accepted by registered salespersons (with the exception of unsolicited orders accepted pursuant to Rule 2.2.6(2.1)2.2.1(d)) must be suitable and put the client’s interest first in accordance with Rule 2.2.6(1) 1(c). Where the registered salesperson recommends a leverage strategy to a client or where the registered salesperson is aware that a transaction involves the use of borrowed funds, the registered salesperson must ensure that the client’s account is identified as “leveraged” on the Member’s system in accordance with the Member’s policies and procedures.

2. Registered salespersons must assess the suitabilitymake a suitability determination

considering all of investments in aeach client account whenever:

− the Member or registered salesperson becomes aware of a change in an investment in the client’s account that may result in the investment or account not being suitable or putting the client’s interest first;

the client transfers to the Member or transfers assets into an account at the Member; − the Member or registered salesperson becomes aware of a material change in the

client’s KYC information; or − the Member or registered salesperson has reviewed the client’s KYC information in

accordance with the review requirements set out under Part II (Opening New Accounts), Changes to KYC Information, paragraph 1; or

the client account has been re-assigned to the registered salesperson from another registrant at the Member.

Where there is a transfer of assets into an account at the Member or where the client account is re-assigned to the registered salesperson from another registrant at the Member, the suitability assessment determination must be performed within a reasonable time, but in any event no later than the time of the next trade. The determination of “Rreasonable time” in a particular instance will depend on the circumstances surrounding the event that gives rise to the requirement to perform the suitability assessmentdetermination. For example, with respect to client transfers, the volume of accounts to be reviewed may be a relevant factor in determining reasonable time.

Where the Member or registered salesperson becomes aware of a material change in the client’s KYC information, the suitability assessment determination must be performed no later than one business day after the date on which the notice of change in information is received from the client.

3. Registered salespersons must also assess the suitabilitymake a suitability determination

with respect to of a leverage strategy having regard to the client’s investment knowledge,

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risk profiletolerance, age, investment time horizon, income, net worth and investment needs and objectives whenever: − − the Member or registered salesperson becomes aware of a change in an investment

in the client’s account, which was purchased using borrowed funds, that may result in the investment or account not being suitable or putting the client’s interest first;

the client transfers assets purchased using borrowed funds into an account at the Member;

− the Member or registered salesperson becomes aware of a material change in the client’s KYC information; or

− the Member or registered salesperson has reviewed the client’s KYC information in accordance with the review requirements set out under Part II (Opening New Accounts), Changes to KYC Information, paragraph 1; or

the client account has been re-assigned to the registered salesperson from another registrant at the Member.

Where there is a transfer of assets purchased using borrowed funds into an account at the Member or where the client account is re-assigned to the registered salesperson from another registrant at the Member, the suitability assessment determination must be performed in a timely manner as soon as possible after the transfer in accordance with the circumstances, but in any event no later than the time of the next trade.

Where the Member or registered salesperson becomes aware of a material change in the client’s KYC information, the suitability determination must be performed no later than one business day after the date on which the notice of change in information is received from the client.

4. Should a registered salesperson identify unsuitable investments in a client’s account or an

unsuitable leverage strategy , the registered salesperson must advise the client and take appropriate steps to determine if there has been any change to client circumstances that would warrant altering the KYC information. Where there has not been a change in client circumstances, it is inappropriate to alter the KYC information in order to match the investments in the client’s account or the leverage strategy. If there is no change to the KYC information, or if investments in the account or the leverage strategy continue to be unsuitable after the KYC information has been amended, the registered salesperson should discuss any inconsistencies with the client and provide recommendations that would satisfy requirements under Rule 2.2.6(1)(a) and (b)as to rebalancing investments in the account. Transactions in the account must only be made in accordance with client instructions and any recommendations made with respect to the rebalancing of the account must be properly recorded.

Where an existing leverage strategy is determined to be unsuitable, the client must be advised of his/her options.

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5. Registered salespersons must maintain evidence of completion of all suitability assessments determinations performed and any follow up action taken. with respect to such assessments.

IV. BRANCH OFFICE SUPERVISION

1. An on-site branch manager is in the best position to know the registered salespersons in the office, know or meet many of the clients, understand local conditions and needs, facilitate business through the timely approval of new accounts and respond immediately to questions or problems. In accordance with Rule 2.5.5(c), a Member may designate a branch manager for a branch office who is not normally on-site. In determining whether an on-site branch manager is necessary at a branch, a number of factors, including the following, should be considered:

− the specific activities at the branch; − complaint history; − number of Approved Persons at the branch; − experience of Approved Persons at the branch; − trade volume/commissions earned; − results of previous Policy No. 5 branch reviews; − MFDA compliance examination findings; − daily trade supervision issues; − supervisory tools used at the branch (manual or automated); − the nature of outside activities carried on at the branch; and − the availability of a branch manager or branch managers in nearby locations.

2. Where a branch or sub-branch does not have an on-site branch manager, the Member must

assign an off-site branch manager to the location. The Member’s policies and procedures must include provision for periodic visits to the branch and sub-branch by the branch manager, or other Approved Persons at the Member who are delegated supervisory responsibility, as necessary to ensure that business is being conducted properly at the location. Members must maintain records of the visits as well as issues identified and follow-up action taken.

3. Members must maintain an internal record of branch managers and the branches and sub-

branches they are responsible for supervising.

Daily Reviews

1. All new account applications and updates to client information must be reviewed and approved in accordance with this Policy.

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2. The branch manager (or alternate) must review the previous day's trading for unsuitable trades, leveraging and any other unusual trading activity using any convenient means. This review must include, at a minimum, all: − initial trades; − trades in exempt securities (excluding guaranteed investment certificates); − leveraging for accounts other than registered retirement savings plans or registered

education savings plans; − trades in accounts where the client is a Related Person, as defined by the Income Tax

Act (Canada), of the registered salesperson and the registered salesperson has full or partial control or authority over the financial affairs of the client;

− redemptions over $10,000; − trades over $2,500 in moderate-high or high risk investments; − trades over $5,000 in moderate or medium risk investments; and − trades over $10,000 in all other investments. For the purposes of this section, “trades” does not include redemptions except where specifically referenced.

3. When reviewing redemptions, branch managers should seek to identify and assess:

− Review the make a the suitability determination in respect of the redemption, having with regard to the composition of the remaining portfolio;

− assess the impact and appropriateness of any redemption charges; − consider possible outside activity where money may be leaving the Member for

reinvestment into other potentially inappropriate or unauthorized investments; and − consider potential churning, including situations where redemption proceeds are

being held on a temporary basis pending reinvestment. 4. The branch manager (or alternate) is responsible for following up on unusual trades

identified by head office.

Other Reviews

1. The branch manager must review the suitability make a review a suitability determination considering of investments in each client account and the suitability of the client’s use of leverage, if any,. Where the Member becomes aware of a material change in the client’s KYC information that results in a significant decrease in the client’s risk profiletolerance, investment time horizon, income or net worth or more conservative investment needs and objectives. Tthe review of a suitability determination assessment must be performed no later than one business day after the date on which notice of the change in information is received from the client.

2. In addition to transactional activity, branch managers must also keep themselves informed

as to other client-related compliance matters such as complaints.

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V. HEAD OFFICE SUPERVISION

A two-tier structure is required to adequately supervise client account activity. While the head office or regional area level of supervision by its nature cannot be in the same depth as branch level supervision, it should cover the same elements. Head office review should be focused on unusual activity or reviews that cannot be carried out at the branch level. Head office reviews must include procedures to effectively detect unsuitable investments and excessive trading in client accounts.

Daily Reviews

1. In addition to the trading review criteria for branch managers, head office must conduct daily reviews of account activity which must include, at a minimum, all: − redemptions over $50,000; − trades over $5,000 in exempt securities (excluding guaranteed investment

certificates), moderate-high or high risk investments, or leveraging for accounts other than registered retirement savings plans or registered education savings plans;

− trades over $10,000 in moderate or medium risk mutual funds; and − trades over $50,000 in all other investments (excluding money market funds). For the purposes of this section, “trades” does not include redemptions except where specifically referenced.

2. There must be closer supervision of trading by registered salespersons who have had a

history of questionable conduct. Questionable conduct may include trading activity that frequently raises questions in account reviews, frequent or serious complaints, regulatory investigations or failure to take remedial action on account problems identified.

3. Daily reviews should be completed within one business day unless precluded by unusual

circumstances.

4. Daily reviews should be conducted of client accounts of producing branch managers.

Other Reviews

1. Tthe Member must, on a sample basis, review make a suitability determination review the suitability of investments in accounts, where clients have transferred assets into an account The Member must have policies and procedures regarding sample size and selection, which should be based on the risk level associated with the account, focusing on accounts that hold higher risk investments, exempt securities or products not sold by the Member, accounts where the client is a Related Person, as defined by the Income Tax Act (Canada), of the registered salesperson and the registered salesperson has full or partial control or authority over the financial affairs of the client and accounts employing a leverage strategy other than registered retirement savings plans and registered education savings plans. The Member’s reviews must be completed within a reasonable time, but in any event no later

Appendix A

Page 15 of 15

than the time of the next trade.

2. Members must also review the suitabilitymake review a suitability determination of the use of leverage in all cases where the client transfers assets purchased using borrowed funds into an account at the Member,. Given the high risk nature of leveraging strategies, the Member’s reviews must be completed in a timely manner as soon as possible after the transfer in accordance with the circumstances, but in any event no later than the time of the next trade.

VI. IDENTIFICATION OF TRENDS IN TRADING ACTIVITY

1. Members must establish policies and procedures to identify trends or patterns that may be of concern including: − excessive trading or switching between funds indicating possible unauthorized

trading, unsuitable trades, lack of suitability or possible issues of churning (for example, redemptions made within 3 months of a purchase, DSC purchases made within 3 months of a DSC redemption or accounts where there are more than 5 trades per month);

− excessive switches between no load funds and deferred sales charge or front load funds;

− excessive switches between deferred sales charge funds and front load funds; and − excessive switches where a switch fee is charged.

2. Head office supervisory review procedures must include, at a minimum, the following criteria: − a review of all accounts generating commissions greater than $1,500 within the

month; − a quarterly review of reports on assets under administration (“AUA”) comparing

current AUA to AUA at the same time the prior year; − a quarterly review of commission reports for the previous 12 month period comparing

commissions received in the current year to commissions received for the same period in the prior year.

Significant increases in commissions or AUA beyond those caused by market fluctuations may indicate issues with churning or leveraging strategies. Significant decreases may indicate potential inappropriate outside activity.

3. Reviews should be completed within 30 days of the last day of the period being reviewed

unless precluded by unusual circumstances.

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Appendix A